Australia Economy Set for Softer Landing: RBA Governor

The head of Australia's central bank on Tuesday said its aggressive interest rate cut this month, combined with fiscal stimulus and a fall in the local dollar, would help cushion the domestic economy from global turmoil.

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"These changes will act to lessen the extent of the likely slowdown in Australia's economy, even as global forces work the other way," Reserve Bank of Australia (RBA) Governor Glenn Stevens told business leaders in a speech.

He also said steps by central banks to add liquidity to credit markets and support stressed banks looked to be working, lessening the risk of a "global catastrophe".

The RBA cut its cash rate by a dramatic 100 basis points to 6.0 percent earlier this month, the biggest easing in 16 years.

This essentially brought foward reductions that might ordinarily have taken place over several months, said Stevens.

"The Australian government has made a significant change to the fiscal stance which will flow through to the demand side of the economy," added Stevens.

The Labor government last week suddenly announced a stimulus package worth A$10.4 billion ($7.3 billion), equal to about 0.9 percent of economic output.

And there was the fall in the Australian dollar, which had tumbled by around 20 percent in trade weighted terms in the past couple of months. This "also amounts to a significant change for the trade-exposed sectors of the economy," said Stevens.

Inflation was likely to remain high over the next few months, he added, and noted that Monday's high reading for producer prices illustrated the RBA's concerns about inflation.

Producer prices jumped a record 2.0 percent in the third quarter, reinforcing expectations that consumer price inflation had climbed to around 5.0 percent, well above the central bank's 2 to 3 percent target.

"But looking forward to next year, forces seem now to be building that will start to dampen pressure on prices," said Stevens.

On the strains in credit markets, Stevens said it was important global central banks keep providing liquidity to the banking system. The RBA's latest expansion of its lending facilities to banks could support over A$50 billion of additional liquidity if needed, he added.

But action was also needed to restore trust between borrowers and lenders, which in many countries meant re-capitalising the banks.

The RBA did not feel capital injections were needed in Australia given the banks were profitable and strongly capitalised already.

Stevens said steps to guarantee Australian bank deposits and the wholesale debt obligations of institutions here were sensible.

However, he said more work needed to be done on the details of the guarantees, both here and abroad.

"The RBA is working with our colleagues in the Treasury on the details of the Australian arrangements, including how to maintain continued healthy functioning of Australia's short-term money markets," said Stevens.

"There is much more work to be done yet...but the world, it seems to me, is on a much better path," said Stevens. "The likelihood of a global catastrophe has in fact declined over the past couple of weeks."

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